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Can Costco Muster Up a Post-Earnings Rally?

Costco has a tendency to sell off when it reports earnings. Will the stock follow the same pattern this time around?

The retail sector has been a mixed bag in 2020 and rightfully so. But in that mix there have been a handful of winners, one of which is Costco Wholesale  (COST) - Get Costco Wholesale Corporation Report.

Simply put, the company continues to deliver for investors who are willing to stay long the name.

Shares have chugged higher by 28% this year, as Walmart  (WMT) - Get Walmart Inc. Report, Target  (TGT) - Get Target Corporation Report and a few others in the sector continue to shine.

Investors are hopeful that Costco can deliver another solid result when it reports earnings on Thursday after the stock markets close.

Here’s the only problem (if we can even call it that):

Costco gives investors monthly updates. While that is not a bad thing necessarily, constantly hitting investors with positive updates sucks out some of that positive surprise we would normally get when Costco reports quarterly results.

So far this year, Costco has had a dip in the immediate session following earnings. Will we get another repeat of that price action?

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Trading Costco

Daily chart of Costco stock.

Daily chart of Costco stock.

You’ll notice that Costco hit its all-time high on Dec. 1. That’s also the day that the company paid a special dividend of $10 a share.

Do unhealthy companies pay special dividends, particularly in a year dominated by a pandemic? No.

But that doesn’t mean Costco will rally when it reports earnings. If it does, bulls will first be looking for a gap-fill up toward $385.50. Above that and the all-time highs are in play near $388.

If Costco can push above that area, let’s see if the $400 level is in play, along with the 261.8% extension from the March low to the February 2020 high near $399.50.

Above that and a longer-term target of $419.50 can be used, which is the three-times range extension.

On the downside, notice how nicely the stock has been holding the 20-day moving average over the last five sessions.

If this level holds on a muted earnings response, that bodes well for bulls. However, that’s a pretty tight leash for a binary event like earnings. In this case, a dip to the 50-day moving average wouldn’t be the end of the world.

That mark has been supporting Costco stock for months now. Below it could put the $345 to $355 area in play, along with the 100-day moving average.